Thursday, February 17, 2011

Swiss Franc Captures Safety Bids

NEW YORK—The dollar weakened broadly, as initial optimism from encouraging U.S. data was overshadowed by geopolitical jitters that favored such safe harbors as the Swiss franc.

Still, the U.S. currency pared its losses late as minutes of the Federal Reserve's latest policy meeting showed central bankers were getting rosier about the economy in January.

The U.K. pound briefly plunged after the Bank of England's latest quarterly report on inflation suggested that U.K. central bankers aren't ready to start raising interest rates to combat persistently high inflation. Higher rates can lift a currency's value if they aren't seen as hurting an economy.

But by late afternoon in New York, sterling had recovered to $1.6096, after touching $1.5988, though it still was down from $1.6124 late Tuesday. The euro strengthened to $1.3570 from $1.3482 and to 113.44 yen from 113.01 yen. The dollar moved to 83.58 yen from 83.82 yen. The dollar weakened to 0.9593 Swiss franc from 0.9673 franc, after hitting 0.9555 franc.

The dollar got off to a strong start after data on housing starts and producer prices painted an improving picture of the U.S. economy. But it reversed course after reports that Iranian warships were planning to head for Egypt's Suez Canal, which sparked a response from Israel. That spurred investors to seek refuge in the Swiss franc, a favored safe harbor in times of global upheaval.

The dollar recouped some of its losses in the afternoon on the upgraded Fed economic forecast for 2011, which sparked expectations that, while still far off, higher U.S. interest rates eventually could be in the cards.

"The market is starting to anticipate Fed action sooner rather than later," said Jessica Hoverson, fixed-income and foreign-exchange analyst at MF Global in Chicago.

Fed officials were becoming slightly more optimistic about the U.S. economy when they met three weeks ago, but still were unwilling to stop their $600 billion bond-buying program before the scheduled end in June. Officials expect U.S. gross domestic product to rise 3.4% to 3.9% this year.

"It has been an unusually choppy session," said Marc Chandler, a currency analyst at Brown Brothers Harriman in New York, in a note. "One signal that we have found fairly reliable are interest rate spreads, and they are moving in the U.S. direction."

Across the Atlantic, the U.K. pound plunged to below $1.60 after the Bank of England's latest inflation report, along with public comments by central bank governor Mervyn King and discouraging labor market data, threw cold water on the notion that the U.K. central bank could start raising rates in May. A day earlier, the pound rallied after data showed Britain's inflation rate had jumped to an annual 4% in January, double the central bank's medium-term target of 2%.

Inflation concerns are likely to stay front and center on Thursday, when the U.S. reports its own data on consumer prices. "Everyone is focusing on inflation and how central banks respond," says MF Global's Ms. Hoverson.